Here Are the Major Takeaways From Verizon's Earnings

Thanks to a hugely valuable asset, Verizon is blowing away its biggest competitor.

Bob Ciura
Bob Ciura
Jul 24, 2014 at 1:30PM
Technology and Telecom

Telecommunications giant Verizon Communications (NYSE:VZ) is a company on the move. While you might normally think of a $210 billion company as a lumbering giant, think again. Verizon is making huge investments in enhancing its infrastructure and is fresh off a gigantic acquisition of a prized asset.

Plus, Verizon's high-quality customer base is giving it an edge over close competitor AT&T (NYSE:T). Now that Verizon's second quarter earnings report is out, here's what you should know.

Once again, wireless does the heavy lifting
In all, Verizon produced 5% growth in total revenue, and 24% growth in adjusted earnings. It's no surprise that Verizon Wireless led the way. Revenue growth in the wireless business outpaced revenue growth in wireline.

Verizon Wireless also increased operating profit margin last quarter. Verizon is benefiting greatly from the high-quality customer base in its wireless business. The company added 1.4 million retail connections, all of which were postpaid. 94% of Verizon's 104.6 million wireless subscribers are postpaid.

Verizon's high-quality services are highlighted by its rapid expansion of 4G LTE across the country. Verizon Wireless offers the largest such network in the United States, and added capacity to it last quarter by adding bandwidth called XLTE.

Last quarter, Verizon performed much better than close rival AT&T, which is struggling to grow profits because of its ongoing discounting practices. Earlier this year, AT&T introduced cheaper plans designed to lower customer churn. While that has worked to reduce churn, evidenced by AT&T's best-ever churn last quarter, it's unable to reap high margins from promotional plans.

AT&T said that half of its subscribers have already flocked to its "Mobile Share Value" plans, which are hurting profitability. Earnings per share clocked in at $3.55 billion, down 7% year over year.

Major acquisition to keep growth intact
In all, this marked the sixth consecutive quarter in which Verizon produced double-digit operating income and earnings growth.

These contributions are the result of the massive acquisition to purchase the remaining portion of Verizon Wireless that the company didn't already own. Recall that Verizon bought the remaining 45% stake from European telecom giant Vodafone (NASDAQ:VOD) for an astounding $130 billion.

But, while this has saddled Verizon with a mountain of debt -- $107 billion in long-term debt, to be exact -- the benefits of the acquisition are clear. To help fund the deal, Verizon sold $49 billion worth of bonds in the largest corporate bond deal ever.

The asset Verizon received, in turn, will provide plenty of cash to justify the acquisition. Verizon's free cash flow jumped 45% last year to $22 billion. This was due primarily to excellent results in its wireless business. With the entire investment secured, future cash flows should keep growing.

Verizon Wireless is the biggest and most profitable wireless carrier in the United States. The acquisition was immediately accretive to Verizon's earnings, because wireless services are a very high-margin business.

To that end, Verizon's earnings before interest, taxes, depreciation, and amortization, or EBITDA, margin is more than twice as high for its wireless business than for the wireline business. In short, Verizon Wireless is an absolute goldmine that will produce years of free cash flow growth.

The better play among twin telecoms
Verizon and AT&T might seem like identical companies. Indeed, they offer extremely similar services and both stocks offer similar valuations and dividends. But, beneath the surface, it's clear that Verizon struck gold when it purchased its remaining stake in Verizon Wireless.

Verizon Wireless is a hugely valuable asset with a high-quality customer base. In comparison to AT&T, which is resorting to discounting to keep customers, Verizon has no such need. This explains why two closely related companies can display such different earnings results.

Because of this, Verizon is the better pick right now among the two major U.S. telecommunications stocks.